Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Franke, Reiner; Westerhoff, Frank

doi:10.1002/9781119483328.ch2

Cited by 11 publications

(12 citation statements)

References 59 publications

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“…Westerhoff and Hohnisch, ) was inspired by Kirman's () seminal ant model, which introduced a slightly different specification from the TPA. This discussion is contained in an extended version of this paper (Franke and Westerhoff, ).…”

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confidence: 99%

Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Franke

Westerhoff

2017

Journal of Economic Surveys

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This paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro‐dynamic models that can capture some of its crucial aspects in a rigorous way. Two approaches are considered: the discrete choice and the transition probability approach, where individual agents face a binary decision and choose one of them with a certain probability. These assessments are adjusted upward or downward in response to what the agents observe, which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions. Typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits. On the whole, the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework.

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Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Franke

Westerhoff

2017

Journal of Economic Surveys

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“…A large literature on empirical validation of behavioural heterogeneous agents models has developed, recently surveyed by Franke & Westerhoff (2017) and Lux & Zwinkels (2018). Here we discuss the estimation of a 2-type model in Hommes & Veld (2017) and Boswijk et al (2007); see also Lof (2015) and Chiarella et al (2014) for similar models.…”

Section: Empirical Validation Of Behavioral Asset Pricing Modelmentioning

confidence: 99%

Behavioral and Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach

Hommes

2021

Journal of Economic Literature

133

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This survey discusses behavioral and experimental macroeconomics, emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question of under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity)—where optimistic (pessimistic) expectations can cause a boom (bust)—coordination failures are quite common. The economy is then rather unstable, and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behavior surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system. (JEL C63, C90, D91, E12, E71, G12)

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“…Such transition rates, which yield the evolution equation different from equation (11), may be unrealistic as they are asymptotically unbounded. In addition, the transition rates given by equations (10) patch up the differences, discussed in Franke and Westerhoff (2017), between the transition probability (Weidlich andHaag 1983, Lux 1995) and discrete choice Hommes 1997, 1998) approaches to modeling opinion dynamics.…”

Section: Derivation Of Model Equationsmentioning

confidence: 99%

“…Subsequently, equation (11) has appeared in the socioeconomic context, often in stationary form. See, for example, reviews byBrock and Durlauf (2001) and byFranke and Westerhoff (2017).…”

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An endogenous mechanism of business cycles

Kroujiline

Gusev

Ushanov

et al. 2019

Algorithmic Finance

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This paper suggests that business cycles may be a manifestation of coupled real economy and stock market dynamics and describes a mechanism that can generate economic fluctuations consistent with observed business cycles. To this end, we seek to incorporate into the macroeconomic framework a dynamic stock market model based on opinion interactions (Gusev et al., 2015). We derive this model from microfoundations, provide its empirical verification, demonstrate that it contains the efficient market as a particular regime and establish a link through which macroeconomic models can be attached for the study of real economy and stock market interaction. To examine key effects, we link it with a simple macroeconomic model (Blanchard, 1981). The coupled system generates nontrivial endogenous dynamics, which exhibit deterministic and stochastic features, producing quasiperiodic fluctuations (business cycles). We also inspect this system's behavior in the phase space. The real economy and the stock market coevolve dynamically along the path governed by a stochastically-forced dynamical system with two stable equilibria, one where the economy expands and the other where it contracts, resulting in business cycles identified as the coherence resonance phenomenon. Thus, the incorporation of stock market dynamics into the macroeconomic framework, as presented here, allows the derivation of realistic behaviors in a tractable setting.Note that the price drift is positive provided > * 2 ⁄ , which means that, in the long run, good news reflective of technological progress must (approximately) exceed expectations to sustain the longterm growth.Hence, as expected, model (11-13) does not refute the efficient market model but instead encompasses it as a particular case. To sum up, the results reported so far enable us to reasonably conclude that model (11)(12)(13), derived from first principles, establishes a general, tractable and credible 14 Blanchard (1981) also included a fiscal policy term. We do not consider policy effects in this work. 15 Equation (17) can be obtained, as a limiting case, from a dynamic extension of Cobb-Douglas production,where output adjusts over time to changes in capital subject to credit frictions (Gusev et al, 2019).

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Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Cited by 11 publications

References 59 publications

Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Taking Stock: A Rigorous Modelling of Animal Spirits in Macroeconomics

Behavioral and Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach

An endogenous mechanism of business cycles

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